In those early days of international business, the gold standard, which was gold that was accepted as an international form of currency for the exchanging of goods and services have begun to flourish. Gold was used as the currency as gold was a limited supply commodity, and therefore generated high demand. Next, gold was highly deterrent to corrosion, in which it can be stored and treated for hundreds and hundreds of years.
Next, gold can simply be melted into smaller coins, or large bars of gold, and which could be used to receive payment for both large and small purchases. There are some disadvantages of using gold as a currency. The weight of the gold itself makes transportation expensive. In the past when gold was being transported by ship there were instances where the ship would sink at sea, and therefore the gold would sink to the bottom of the ocean floor and was therefore lost forever.
The gold currency later collapsed because merchants were looking for a new and more innovative way to pay for global payments without having to ship large quantities of gold around the world. This is one of the reasons why the gold standard was created, which created an international money system in which countries had linked the value of their currencies (paper) to the specified value of gold. The first country to implement a gold standard was Britain in the early eighteenth century and had continued to employ the gold standard until World War One.
The gold standard has required countries to fix the value price of their currency against pure gold. Par value is the value of the nation’s currency described in terms of the gold suggested. Each country must then ensure that their paper currency can be converted into gold for anyone who may demand that they be at par value. Purchasing power parity, was the way in which a country and their currencies par value is to be calculated. PPP had allowed the purchasing power of gold amongst all participating nations similar, as well insured that the purchasing power of the nation’s currency was to be continued. For all those participating countries that had fixed their currency to gold had also inadvertently linked their nation’s currency to another nation’s currency; this will be called a fixed exchange rate system.
The gold standard had many advantages; it had substantially reduced their risk and exchange rates as it had maintained fixed exchange rates between nations currencies. Further the gold standard had imposed strict money policies on all nations that participated in the system. Lastly the gold standard had helped to correct a country’s trade imbalances
The gold standard had collapsed when those countries that were involved in world war one had needed to finance their war expenditures and they had done so by simply printing more currency in the paper form. This had without a doubt exceeded the principle of the gold standard and had forced countries to abandon the use of the gold standard. When excessive paper currency was being printed it had created rapid inflation for those countries. Simply when the gold standard had linked nations currencies to one another, when one currency had become devalued in terms of the gold that it is a par with had simply negatively affected the exchange rate between nation’s currencies.